Recent Buy – Main Street

MAIN

February sure is turning into a month which is exceeding my own expectations of purchases and putting cash to work. I made one last purchase before the end of the month. I was originally planning this purchase for the next month, but as is the case, the stock market provides some catalyst that is hard to predict and an investor has to take a decision and move. Moreover, if an investor’s mind is made up to invest in something, there’s no point in holding off and is better to pull the trigger. This new purchase adds a new company to my portfolio – my 26th individual company (excluding the ETFs).

I initiated a position in Main Street Capital Corp (MAIN) with 50 shares @ $30.69. The company announced a dividend increase this morning before market open and I decided that it was as good a time as any to start a position. The new dividend amount is $0.175/share, up from $0.17/share paid monthly. The forward yield is 6.85% and adds $105 to my FY annual dividend income.

Corporate Profile

From Yahoo! Finance:

Main Street Capital Corporation is a business development company specializing in long- term equity, equity related, and debt investments in small and lower middle market companies. The firm focuses on investments in warrants, PIK (Payment in Kind) interest, convertible securities, junior secured or unsecured, subordinated loans, private equity, venture debt, mezzanine investments, mature, mid venture, industry consolidation, later stage, late venture, emerging growth, management buyouts, ownership transitions, recapitalizations, strategic acquisitions, business expansion, growth financings, and other growth initiatives primarily for later stage businesses. It does not seek to invest in start-up companies or companies with speculative business plans. It seeks to invest in traditional or basic businesses. The firm primarily invests in companies based in the Southern, South Central, and Southwestern regions of the United States but also considers other domestic investment opportunities. It invests between $2 million and $15 million in companies with revenues between $5 million and $300 million, enterprise values between $3 million and $50 million, and EBITDA between $1 million and $20 million. The firm seeks to charge a fixed interest rate between 12 percent and 14 percent, payable in cash, in case of its mezzanine loan investments. The firm typically invests in the form of term debt with equity participation and/or direct equity investments. It prefers to maintain fully diluted equity positions in its portfolio companies of 5 percent to 50 percent, and may have controlling interests in some instances. The firm also co-invests with other investment firms. It seeks to exit its debt investments through the repayment of the investment from internally generated cash flow and/or refinancing within a period of three to seven years. Main Street Capital Corporation was founded in 1997 and is based at Houston, Texas.

Recent Buy Decision

  • As the company profile details above, Main Street is a business development company (BDC). For regular readers of this blog, you may remember I discussed BDCs as an alternative to an alternative form of investing a few months ago. An alternative investment can be private equity and while retail investors can find it hard to get private equity, BDCs are a proxy that works very well in this form of investment.
  • BDCs provide access to a different part of the economy that is unavailable otherwise.
  • Main Street specializes in long-term equity, equity related, and debt investments in small and lower middle market companies. MAIN does not seek to invest in start-up companies or companies with speculative business plans, but rather in traditional or basic businesses.
  • While there are plenty of BDCs out there, MAIN is the most conservative and one of the best run BDCs available for investment.
  • The yield 🙂
  • The growth in yield – MAIN is not only a high yielder, but also grows dividends.
  • The company also has a history of special dividends on a semi-annual basis for the past couple of years. I rather prefer special dividends if companies have extra cash to return, rather than a stock buybacks.
  • In this frothy market, there are seldom any insiders buying their own stock – and MAIN has seen some of its directors picking up shares over the course of last year, which should be a good indication of the company’s outlook.

Risks

  • The nature of BDC itself is risky as they invest in smaller/micro/unknown companies.
  • Some other BDCs have recently cut dividends as they had run off the charts. While the other BDCs took more risk in their investment and had to rein their payouts in, MAIN is more conservative. However, MAIN is not immune to the headwinds of an economy and if the portfolio holding companies go bust, MAIN could have trouble paying its dividends.
  • MAIN’s business is concentrated in the southern and the southwestern US states. Texas and the other states are facing more headwinds than the rest of the US due to the oil price crash and it remains to be seen how this will impact the smaller companies in the region.
  • Since its an investment company – interest rate and access to cheap capital plays a big role.

Conclusion

Main Street Capital (MAIN) is a business development company (BDC) that provides investors with access to a special marketplace that is inaccessible by investing elsewhere. While investing in private equity can be risky, which is usually the focus of BDCs, MAIN is different in that it does not invest in start-ups, but rather invests in established small and lower middle market companies. MAIN is probably the most conservative company in the BDC space and the yield provides a lucrative option for income seeking investors.

Summary:

  • Symbol: MAIN
  • Quote: $30.93
  • 52-week range: $26.42-$35.59
  • P/E: 13.21
  • Forward P/E: 12.80
  • Yield: 6.8%
  • Payout: 76%

Further Reading:

Full Disclosure: Long MAIN. My full list of holdings is available here.

19 thoughts on “Recent Buy – Main Street

  1. JC says:

    Interesting buy. I’ve seen MAIN in some portfolios but I just don’t know enough about how they operate to feel comfortable investing in them. Although MAIN does seem to be the cream of the BDC crop. The yield is juicy and the fact that they raise the dividend is even more enticing. Guess this will have to be added to my long list of companies to try and learn more about.

    • JC,
      MAIN definitely is the cream of the crop in the BDC world. I have been reading up on them for the past few months and there are plethora of options available – even though all the companies are called BDC, each chooses to invest in different style of companies in various stages of their life. Have a look at the newsletters and analysis posted by BDC_Buzz on Seeking Alpha – he provides various metrics of measuring BDCs and breaks it down well.
      You might recognize some of the names in the portfolio companies since they operate mostly in your neck of the woods. I dont recognize any of those names.

      Best wishes
      R2R

  2. Congrats on beefing up those forward dividends with a monster yield, R2R! This sounds like a very interesting company. I had seen a few articles about it in passing but I didn’t know much, so thanks for the analysis. Now that you’re the first shareholder of the company I know of I need to dig in deeper. I’m glad you’re jumping on financial stocks because in general they seem undervalued at the moment. Great job all around!

    Best Wishes,
    Ryan

    • Ryan,
      Financials sure are attractive right now. Apart from Energy and commodities, financials provide pretty decent value in the current market. BDCs are a different beast and BDC_Buzz (can be found on Seeking Alpha) is probably the best resource available on the subject. I recommend following him and reading his analysis for a better understanding.
      BDC and MAIN have been on my radar for months and I kept putting it off and finally decided to pull the trigger today. Not something that was a deciding factor, but what I found interesting, was that some smaller oil & gas players in the US, facing the headwinds in the industry and now turning to BDCs for raising money and outlast the storm. Definitely an interesting play. Its a much riskier investment, but theres appropriate reward too 🙂

      regards
      R2R

  3. Hi R2R, that is a very attractive dividend yield! The capital gain growth doesn’t look that bad either. I will definitely add it to my watch list and wait for an attractive price before purchasing.

    Another company on my current watch-list with a super high yield is Richard’s Packaging. Sounds like a really promising company too. Have you heard of it?

    • Hi Jeff,
      The company’s capital gain isnt bad, but its more of a yield play. Ive been watching the stock for a few months now and its see-sawing between 28 and 31. With the increased yield, the floor will be a bit higher, I presume.

      No, I havent heard of Richard’s packaging. I will have to check it out. The only packaging company that I know is Bemis, which is a reliant dividend grower over the years. Thanks for the tip…ill check out RPI.

      cheers
      R2R

  4. I must admit that I don’t really know anything about MAIN. Sounds like an interesting company at a relatively attractive P/E of 13. The payout ratio is a bit high though. Sounds like they have a good business model though (staying away from start-ups). I’ll have to continue watching it now that you’ve put it on my radar.

    Thanks for sharing your purchase….Best Wishes! AFFJ

    • AFFJ,
      Its not one of the traditional dividend growers and hasnt made it to Dave Fish’s CCC list yet. But if they keep up the dividend growth, they might get there. Even if they dont grow their dividends, I am ok with it – I cant really complain when I get 6.8% yield on something these days. The payout is a bit high indeed, but the rest of the fundamentals look pretty good.

      Best wishes
      R2R

  5. Adam says:

    Hi R2R,

    Interesting move, thanks for sharing. Your site is great, along with others like Asset Grinder, A Frugal Family’s Journey, and others. Your thoughtful analysis has been gold for me as I put together my own dividend growth investment portfolio.

    I’m a fellow Canadian, so in regards to buying US equities like Main Street, do you have any strategies to reduce the cost of extra bank or brokerage charges when buying US dollars to buy US stocks?

    I was looking at Norbert’s Gambit, is this something you’ve done or considered?

    Cheers,
    Adam

    • Welcome and thanks for the comment, Adam.
      Im glad to hear that my blog is helping you in your own journey in building your dividend growth portfolio and putting you on your way to financial independence.

      I have used Norbert’s Gambit in the past, but realized that I have to make big purchases and sells of the ETFs in question to really take advantage. I still use it occasionally, but most times, I simply let Questrade do the conversion for me. I take a bit of a hit each time, but once its converted I leave it in US$. Besides, all dividends paid by the US companies are held in US$ and accumulate over time, so I can put that to work. Unfortunately, there arent many options when it comes to cash conversion – and we have to pay the fees if we want to invest in the US market. My only suggestion is to make sure that you minimize the number of conversions and your broker can keep the funds in US$. Questrade does and I think some banks do too, but Ive heard that there are some companies that only allow holding in CAD$ and need to be converted back and forth everytime theres a transaction. If this is the case with you, then you might want to consider having a chat with your broker and/or find a new broker.

      Hope that helps
      R2R

  6. Charlie says:

    I initiated a position last month after – like you – watching it for a little while. btw, MAIN is now a challenger on Dave’s Feb 27th list.

  7. This is a great buy and I’m glad MAIN finally made it onto the CCC list!

    I bought shares of MAIN 5 years ago (not for DivGro, but for an income portfolio). Total return is 120% or 30% annualized. I’m obviously very happy with its performance.

    Good luck!

    • Wow…5 years ago?! Looks like you picked a winner there. I hadnt heard of MAIN and just learned about BDCs last year. I have started off with a small amount….and when I get more comfortable, I will add to this position. Love the huge payouts and the monthly dividend. Looking forward to my first dividend starting in April.

      cheers
      R2R

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